Strong Companies Will Post This Week. No Economic Releases To Stand In the Way.

July 15, 2013

Last week, the market shot higher after “Fed Speak”. It continues to grind higher and Ben Bernanke will address Congress Wednesday and Thursday. The comments haven’t changed much and I can’t justify the move last week. The market hangs its hopes on every word. I don’t believe the Fed Chairman’s comments will have much firepower. Earnings should be in focus this week.

Here are my issues. The selling pressure in the last month has been heavier than we’ve seen in a year. The snapback rally has come on extremely light volume and conditions are changing.

China’s GDP came in at 7.5%. Growth this year is at its lowest level in 23 years and the government does not plan to stimulate the economy. Retail sales were little better than expected and industrial production was a little light. Flash PMI’s, next week and they could be problematic.

Analysts have been calling for a bottom in Europe and there are no signs of improvement. Credit concerns are starting to pop-up and yields are climbing in Portugal.

Domestic activity is meager and Q2 GDP came in at 1.8%. The Fed Chairman said that employment statistics are exaggerated and conditions are fragile. Low-paying and part-time jobs are padding the number. Furthermore, the sequester has not run its course and many spending cuts have yet to be implemented.

Earnings season will kick into high gear this week. The strongest companies announce early in the cycle and the reaction should be positive. That will push stocks higher and that will attract bullish speculators. When they get fully position, the market will be poised for a selloff.

Earnings estimates have been lowered and consequently there will be many “beats”. However, the smart money won’t be fooled. Year-over-year comps will be at their lowest level in many years. Revenues are expected to grow 1.5% and profits are expected to grow 2.5%. Almost 20% of S&P 500 companies have preannounced and the negatives outnumber the positives by a ratio of 5 to 1. J.P. Morgan and Wells Fargo posted great numbers and in both cases the reaction was muted. I believe Q2 could be a sell the news event.

As earnings season progresses, stocks will decline after the number. Economic conditions will continue to slip and profit taking will set in. Bullish speculators will get flushed out and the market will drift back into the middle of its range.

Interest rates are on the rise and Asset Managers will not chase stocks at this level. They will patiently wait for more information and they will monitor the Fed’s comments.

I will buy stocks that post good numbers and provide strong guidance. In particular, I will be looking for horizontal breakouts to a new 52-week high. These moves should last a few days. I will keep my size small and I will set stops/targets.

I will also be watching for signs of strain. When good companies beat estimates and the stock sells off, I will know that resistance is building. In two weeks I will shift to a bearish tactic. I will be looking for stocks that are fully priced in and I want to short them if the earnings reaction is negative.

You can trade the breakout this week. The earnings should be good and there are not any economic numbers to get in the way.

The market wants to creep higher today, but the range has been very tight and we might not see much of a rally.
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